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Kudos to Bank of America's strategists who are rewarded for out-of-consensus view on pound sterling.
Bank of America's (BofA) foreign exchange strategy team has been rewarded for its bullish stance on the British pound relative to the euro, having seen their out-of-consensus forecast target reached.
And because they got the big call correct, it's probably worth listening to what they think about the pound's current valuation against the euro; they say it is now time to turn cautious.
"EUR/GBP target reached, turning neutral," says the bank's sterling FX strategist, Kamal Sharma.
Sharma has been bullish pound sterling relative to the euro this year, saying the market has underappreciated the UK's economic potential.
"Our thesis at the time was that the markets had taken an overly pessimistic view on the UK economy, primarily driven by fiscal concerns," says Sharma.
Pound Sterling Live has held a similar House View since early summer, and like Sharma, has argued the AI investment pulse was underestimated by economists vis-à-vis the pound.
"The macro story has been helped by the AI wave which has boosted growth momentum with other pillars such as the housing and labour market remaining resilient," says Sharma.
Forecast Targets Met
The median of consensus forecasts for EUR/GBP at the start of 2026 was 0.89, whereas Bank of America pencilled in a forecast target at 0.84.
The pair has fallen to 0.8368 by October 23, the lowest since May 2025.
For pound-to-euro watchers, the BofA forecast target is 1.19, against a consensus at 1.12. The high is at 1.1950.
What Comes Next: Three Reasons to Prepare for a GBP Pullback
Pound Sterling Live has for two weeks been predicting - in vain - that the pound-euro rate's rally ought to reverse as overbought conditions are very much in evidence.
Indeed, this week's push higher has left the overbought reading on the RSI to a record level, unseen in more than two decades of data.
BofA's Sharma says there are three reasons to turn cautious on sterling from here:
1) Data surprises at the highs.
A powerful tool in foreign exchange research and prediction is how an economy's data outcomes surprise against the expectation. It makes sense, as it is the surprise element of an event that tends to move a currency, because traders and investors have to reposition to reflect burgeoning strength or weakness.
A look at the UK surprise index from Citi shows the recent months have yielded a run of positive surprises. It now leaves the index looking richly priced (ignore the post-pandeemic spike).
"We think the ability of the UK data to consistently outpace expectations is likely to wane, especially against the backdrop of the UK rates market which is pricing in a cumulative 115bps of rate hikes over the coming year," says Sharma.
2) Positioning headwinds harder to resist
Positioning is also an issue. "GBP option premium has repriced meaningfully in favour of calls across most crosses," says Sharma. In short, that means investors and hedgers have bought a significant volume of option trades that favour upside.
And it's not just EUR/GBP. "GBPAUD skew is above its 90th percentile out to 6m, while GBPUSD, GBPNZD and GBPCAD also favour GBP upside more than usual," says Sharma. "With this much optimism priced, sentiment looks increasingly one-sided."
In short, with the market heavily positioned in one direction, a setback to the bullish narrative could lead a rapid closure of these positions, resulting in downside.
3) Budget risks are underpriced
Wedneday's budget is upon us, and it forms the key event of the fiscal calendar.
There's been a distinct lack of hype ahead of John Healey's first budget when compared to the two delivered by his Labour predecessor, Rachel Reeves.
That's meant the market has effectively downplayed the risks it poses.
"We are struck by the relative calm in UK markets," says Sharma. "We think there are some risks of complacency despite the lack of tangible news flow. We would anticipate GBP to consolidate in the coming sessions as the Budget looms."
Yet, the pound looks to be on course for a fourth weekly advance against the euro, with another fresh multi-week high being printed this Friday. Surely this rally is due to be tested?
